April 30 (Bloomberg) -- At Singapore’s Fullerton Bay Hotel, Prime Minister Lee Hsien Loong and Malaysian counterpart Najib Razak smile and toss yusheng, a raw-fish salad symbolizing prosperity, and in this case a thaw in five decades of feuding.
The traditional feast in February after the Lunar New Year was the latest annual retreat between the sons of former leaders, whose fathers were more likely to hurl accusations than culinary delicacies. After half a century of fighting over everything from a pile of rocks in the ocean, to water supplies and ownership of a railway station, the two premiers are trying to foster cooperation as they face rising competition from other Southeast Asian economies and declining voter support at home.
“The two leaders have good chemistry and rapport and there is a high comfort level,” said Ong Keng Yong, Singapore’s High Commissioner to Malaysia, who has attended annual meetings that Lee and Najib hold. “When businessmen see a good political relationship, they are more comfortable about investing.”
Malaysia is Singapore’s largest trading partner and bilateral trade amounted to S$113.4 billion ($92 billion) in 2012, up from S$77.2 billion in 2003. The island’s investment into Malaysia has climbed about 25 percent annually over the past three years, according to DBS Group Holdings Ltd.
Najib’s visit this year comes as he’s fighting to retain power in elections next week, in contrast to his first official trip as leader in May 2009, a month after he took office. Then, he and his wife Rosmah Mansor had a new hybrid orchid named after them -- Dendrobium Najib Rosmah. Najib said at the time that Singapore and Malaysia should not have rollercoaster relations or be encumbered by historical baggage.
The day after the “lo hei” fish tossing in February, Najib and Lee traveled to Iskandar Malaysia, a special economic zone in Johor state, to unveil projects that will include homes, retailers and spas. One will be developed by Khazanah Nasional Bhd. and Temasek Holdings Pte, the state-owned investment companies of Malaysia and Singapore.
In Singapore’s presidential palace hours earlier, the two leaders had announced plans for a high-speed rail link by 2020 that would cut the 300-kilometer (180-mile) journey to Kuala Lumpur to 90 minutes, with Lee saying the two capitals could be seen as twin cities like London and Paris.
“I think we’re in a much better place now than we’ve been in a long time,” Singapore Finance Minister Tharman Shanmugaratnam said in a February interview. “Not just at a political level but just the sense amongst the middle class and the professional class and the intellectuals that says ‘look, it makes a lot of sense to work together.’”
Economically, Singapore has flourished faster than its resource-rich neighbor, with gross domestic product per capita of $60,688 compared with Malaysia’s $16,051, according to World Bank data for 2011. The island is Southeast Asia’s only advanced economy. Malaysia said last month it may reach high-income status as early as 2018.
With other developing economies in Southeast Asia vying for a bigger share of investment, including Indonesia, the Philippines, Thailand and Vietnam, Malaysia is keen to make better use of Singapore’s financial muscle.
“The wealth they have in Singapore could certainly benefit Malaysia as well, and Malaysia’s hinterland will benefit Singapore,” Najib said in an April interview. “I told Prime Minister Hsien Loong ‘I don’t mind, you can be the Manhattan, we’ll be New Jersey. But we’ll prosper together.’”
It wasn’t always thus. British colonial rule had left a tangle of connections on the peninsula that became touchstones for disputes after independence. Singapore and Malaysia were part of the same union for two years until the city-state was ousted in 1965. Much of Singapore’s fresh water came from a pipeline across the causeway that linked it to Johor, while the island’s main railway station and track remained part of Malaysia.
The two soon bickered over water. Tunku Abdul Rahman, then Malaysian prime minister, said he may pressure Singapore’s foreign policy “by threatening to turn off the water,” according to archival records. When Lee’s father, Lee Kuan Yew, was prime minister, he once said he was prepared to send troops to Malaysia if it tried to turn off the taps.
Even as late as 2003, both nations placed full-page ads in the Asian Wall Street Journal to air their water gripes.
A dispute over Pedra Branca, a football-field-sized islet named for its white guano-covered rocks, lasted 29 years, until the International Court of Justice in The Hague ruled in favor of Singapore in 2008.
Competition for investments fueled the rivalry. Johor’s Port of Tanjung Pelepas more than a decade ago offered lower fees than Singapore’s PSA Corp. to lure away shipping lines on one of the world’s busiest trading routes.
Meanwhile Lee, 61, and Najib, 59, were on paths to power.
Both went to university in the U.K., with Najib graduating in industrial economics at the University of Nottingham while Lee read mathematics at Trinity College, Cambridge, before pursuing a master’s degree in public administration from the Harvard Kennedy School.
Lee’s father was leader of Singapore from the time of independence in 1965, when Najib’s father, Abdul Razak Hussein, was deputy prime minister and a key player in Singapore’s departure from the union, according to the elder Lee’s memoirs. Abdul Razak became premier of Malaysia in 1970.
After college, the younger Lee was in the army, where he quickly rose to the rank of brigadier general. In 1984, at the age of 32, he entered politics and soon became a junior minister in trade and defense.
Najib’s career outside politics lasted only two years, during which he served as an executive at state oil company Petroliam Nasional Bhd., before the sudden death of his father in 1976. He stood for the parliamentary seat Abdul Razak had vacated and was elected unopposed at 23.
Najib got his shot at deputy minister posts in energy, education and finance, before the two sons’ paths aligned with both becoming finance ministers and deputy prime ministers.
As leaders, they have attempted to remodel their economies rather than continuing where their predecessors left off. Lee lifted a four-decade ban on casinos within a year of becoming prime minister, allowing two multi-billion-dollar gaming resorts that now have gambling revenue equivalent to two-thirds of the total on the Las Vegas strip.
While his father promoted the island as a low-cost manufacturing center for companies such as Texas Instruments Inc. in the 1960s, the son presides over one of the world’s largest foreign-exchange centers, with a S$1.34 trillion asset-management industry.
Najib unveiled a so-called economic transformation program in September 2010 that identified $444 billion of projects that the government planned to promote in cooperation with non-state companies, ranging from mass rail to oil storage.
Still, voter pressure has increased on both leaders, with Najib facing the prospect of a general election that could throw him out of power.
His ruling Barisan Nasional coalition faces its biggest challenge in 55 years as it battles a revitalized opposition led by former Finance Minister Anwar Ibrahim in polls on May 5. He has said a win by a fractious opposition could bring “catastrophic ruin.”
Malaysia’s benchmark stock index is Southeast Asia’s worst performer this year, rising 1.7 percent, compared with gains of more than 16 percent in Indonesia and the Philippines.
Anwar called Najib’s comments “shameful” and accused the leader of being like “the proverbial boy who cries wolf.” In a separate interview on March 8, he said he would continue the special relationship with Singapore if he won the election.
“Singapore’s a very important component” within the region, Anwar said. “It has a special relationship and history with us. We need to continue this.”
Lee is also feeling political strains. His People’s Action Party in 2011 had its narrowest election victory since independence after the government’s immigration policy increased voter ire. An influx of foreigners has boosted the population by 1.1 million since mid-2004, to 5.3 million, to make up for a low birth rate among Singaporeans.
With an increasingly crowded island and rising labor costs, Singaporean companies are looking across the causeway to a neighbor that is more than 470 times bigger in size, with a population that’s only about six times larger.
“Whatever government is put in charge through the democratic process will understand that both economies are intertwined and they will have to work with each other,” said Ong, Singapore’s high commissioner to Malaysia. “Stability and continuity are important.”
One such area of cooperation is Afiniti Medini, a 5-acre (2-hectare) project in Iskandar expected to be completed in 2015 that will include about 400 homes and a health spa.
Singapore companies have invested about S$2.5 billion in Iskandar since it was set up in 2006, making the nation the largest foreign investor, according to the Iskandar Regional Development Authority. The zone, almost three times the size of New York City, is located in a state Lee’s father once described as “notorious for shootings, muggings and carjackings.”
Singapore has “pragmatic and strategic reasons” for being interested in Iskandar, said Irvin Seah, an economist at DBS.
“Profit margins are being eroded and local enterprises that are unable to restructure their businesses or improve productivity will either have to cease their operations or relocate,” Seah said. “When you have lower-cost manufacturers like Indonesia and Vietnam emerging and catching up, relationships that are just focused on the manufacturing value-chain will break down. Iskandar includes collaboration in services, property, tourism and this is a model which will be more sustainable.”
Oversea-Chinese Banking Corp., Southeast Asia’s second-largest lender, expects loans to Singapore companies relocating to Iskandar to triple in the next two years, according to Tan Chor Sen, who heads international business at OCBC’s global commercial banking division.
“We’ve had water spats, sand spats but it’s like a brother and sister thing which you have once in a while,” said Leslie Foo, managing director for global markets at Malayan Banking Bhd. in Kuala Lumpur. “I think what has happened in the last three years is what I call a merging of talents. There’s a lot more people who have gone to Singapore to work and there are a lot more guys who have come over here.”
In the April 17 interview, Najib said he was determined to remove the obstacles to bilateral ties when he came to power in 2009 by seeking agreements with Lee on long-standing issues that were mutually beneficial.
“He is someone I can do business with,” said Najib. Singapore officials “are tough to negotiate with but once they agree, things happen, things flow.”
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